Lords of Finance

The most important, perhaps the defining, characteristic of the new currency was not that it theoretically rested on land, but that the amount to be issued was to be rigidly fixed at 2.4 billion Rentenmarks, equivalent to around $600 million. Grasping that the key to its credibility was to keep it sufficiently scarce, Schacht was determined to ensure that the amount in circulation did not exceed its statutory ceiling under any circumstances. And though he encountered considerable political pressure to relent, including from his cabinet colleagues, he stuck to his position. He was obstinate, almost brutal, about turning down loan requests from everyone—government agencies, municipalities, banks, or big industrialists.

Fräulein Steffeck has left a vivid picture of Schacht in those first few days:He sat on his chair and smoked in his little dark room at the Ministry of Finance, which still smelled of old floor cloths. Did he read letters? No, he read no letters. Did he write letters? No, he wrote no letters. But he telephoned a great deal—he telephoned in every direction and to every German and international place that had anything to with money and foreign exchange. And he smoked. We did not eat much during that time. We usually went home late, often by the last suburban train, traveling third class. Apart from that he did nothing.

He took great pride in this portrait, which he never tired of repeating. He relished the image it evoked of the maverick financial genius operating masterfully on his own where established bankers had failed.

For VON HAVENSTEIN, the news of Schacht’s appointment was the final humiliation. Though for the last five years he had presided over the single greatest debasement of a currency in history, he still refused to accept responsibility for the debacle. He kept insisting that it was not his fault but the result of government mismanagement and the Allies’ extortionary demands.

When Stresemann came to power in August 1923, he tried to persuade Von Havenstein to go of his own accord, arguing that the public had lost all confidence in the currency, and that to reverse this required not just a new medium of exchange but a new president of the Reichsbank. Von Havenstein had categorically refused. By November, the chorus of demands that he resign had spread all the way across the political spectrum—everyone except the furthest-right nationalists. Only a few days earlier the leading in

dustrialists had branded him the “father of the inflation.” But the Reichsbank Autonomy Law of July 1922—ironically enacted at the insistence of the British, who hoped, by making the Reichsbank independent of the government, to curb inflation—had given the chief architect of inflation tenure for life.

No one could understand why Von Havenstein, who prided himself on his sense of service, clung so desperately and so humiliatingly to office in the face of such clamor. But he kept repeating that if he went, things would only get worse—how, very few people could see. In many ways it was precisely his pride as a public official that prevented him from resigning and thus acknowledging responsibility for the destruction of the mark and, with it, the savings of so many God-fearing Germans like himself. The most he would concede was that he might resign after a decent interval of several months so as to “preserve his honor.”

Saddled with Von Havenstein, Stresemann had simply bypassed him by creating the independent Currency Commissionership outside of the Reichsbank. And so, when the new currency was introduced on November 15, 1923, Germany found itself in the curious position of having two official currencies—the old Reichsmark and the new Rentenmark—circulating side by side, issued by two uniquely parallel central banks. At one end of town was Schacht, operating from his converted broom closet; at the other, Von Havenstein, holed up and increasingly isolated and irrelevant in the Reichsbank’s imposing red sandstone building on Jagerstrasse. Although the Reichsbank had now stopped providing money to the government, its printing presses still continued to roll out trillions of Reichsmarks to private businesses.

Neither Schacht nor Von Havenstein made any attempt to communicate with the other. The contrast between the two could not have been greater—Von Havenstein, a true gentleman of the old school, kind, courteous, but completely out of his depth; and Schacht, the arrogant upstart, quite prepared to confront the financial establishment, and not caring on whose toes he trod.

The whole justification for the new currency was to provide a stable alternative to the collapsed Reichsmark. The question immediately arose: At what rate could people convert their Reichsmarks into Rentenmarks? On November 12, the Reichsmark was trading at 630 billion to the dollar. Some argued that the rate of conversion should be fixed at that point, but Schacht decided to wait. The black market price was still falling, and he wished to allow the selling to exhaust itself before he committed to a rate of conversion. Every day the Reichsmark plunged further, and every day he insisted on holding back. On November 14, when it fell to 1.3 trillion, he did nothing. A day later, it was at 2.5 trillion and still he sat on his hands. Finally, on November 20, when the Reichsmark stood, if that is the word, at 4.2 trillion to the dollar, he fixed the conversion rate at 1 trillion Reichsmarks to a Rentenmark.

The decision to wait those extra days, allowing the old currency to sink by another 80 percent, was a brilliant tactical move. The Reichsmark became so worthless that the government was able to buy back its many trillions of debt, valued at $30 billion when first issued, for only 190 million Rentenmarks, equivalent to about $45 million.22

For the next few days, marks, both new and old, continued to fall on the black market. On November 26, the Reichsmark was trading at 11 trillion to the dollar in Cologne. Then the strangest thing began to happen. The exchange rate began to reverse itself. By December 10, it was back at 4.2 trillion to the dollar. Within a few days prices stabilized.

When prices were so insanely rising, the average German had done everything he could to get rid of any cash he received as fast as possible. Now this spiral reversed itself. As prices began to hold and then fall, it became profitable to hang on to cash. Farmers, their confidence in money restored, began bringing produce to market, food reappeared in the shops, and those interminable queues began to melt away. Lord d’Abernon, the British ambassador, wrote of the “astonishing appeasement and relief brought about by a touch of the magical wand of “Currency Stability. . . . The economic détente has brought in its train political pacification—dictatorships and putsches are no longer discussed, and even the extreme parties have ceased, for the moment, from troubling. ”

Not all of this was Schacht’s doing. Stresemann and his cabinet colleagues backed the Rentenmark with a series of budgetary measures, suspending all subsidy payments to workers in the Ruhr, firing a quarter of the government workforce, and indexing all taxes to inflation, thus eliminating the incentive for taxpayers to delay payment. By January 1924, the budget was balanced. But it was Schacht who received the prime credit, feted in the press as “The Wizard” or the “Miracle Man.”

MAX WARBURG ONCE remarked that he supported Schacht because “he always had good luck.” That good fortune once more manifested itself. In early November, Von Havenstein took a few days’ leave of absence, in order to get out of Berlin during the humiliation of Schacht’s appointment; but he was also known to be seriously ill. In mid-November, he returned to his official apartment on the top floor of the Reichsbank. On November 20, the day that Schacht fixed the conversion value of the new currency, Von Havenstein after a late evening meeting with his board, suddenly collapsed and died of a heart attack at 3:30 a.m. He was sixty-six.

There was something terribly tragic about this deeply well-intentioned man. Not simply a dutiful bureaucrat, he was by all accounts a wonderful human being, to Max Warburg “an extraordinarily sympathetic personality, with an unbending sense of duty and honorable character.” He was universally admired, kind, principled, and considerate, always living up to the highest virtues of his class. During the war, while most households supplemented their rations by buying under the counter, Von Havenstein not only refused to use the black market, but even donated some of his own paltry bread and meat ration stamps to the poor. In the last year, however, he seemed to have lost his grip on reality—some said that the pressure he was under had made him prematurely senile—and few mourned his passing.

While Schacht was Von Havenstein’s logical successor, his unusual gift for making enemies continued to dog him. The strongest opposition came from within the Reichsbank board, which considered him an unprincipled interloper. The whole Belgian episode resurfaced all over again. The only rival candidate, however, was Karl Helfferich, who as wartime secretary of the treasury had been responsible for the disastrous policies that had left Germany so buried under debt. Helfferich’s political views, allied to a taste for polemics, had propelled him into the vanguard of the right-wing nationalists. Because of his vicious ad hominem attacks on democratic politicians, he was blamed for instigating the wave of assassinations by paramilitary vigilantes. Whatever reservations politicians of the center and left who formed the backbone of the government might have held about Schacht, he was infinitely better than Helfferich. On December 20, Schacht was appointed president of the Reichsbank.

But despite the early success of the currency reform, Schacht was acutely aware that Germany’s problems would not be solved by its efforts alone. Monetary stability was sustainable only while Germany could stall paying reparations. Ultimately, it would have to strike a deal with the Allies and resume some payments; and at that point, the mark would begin to plummet again.

Schacht believed, moreover, that the Rentenmark, based as it was on the fictional security of land, could only offer a temporary solution, “a bridge between chaos and hope,” as he called it. Ultimately any stable German currency would have to be backed by gold. Since the Reichsbank held less than $100 million of the metal, wholly insufficient as the basis for an economy the size of Germany’s, he would have to find some way of borrowing from abroad to bring the gold backing to an adequate level.

The United States was the obvious place to go—of all the powers after the war, it was the only one with surplus capital. But for the past three years it had withdrawn from European affairs, though there were some signs that it was waking up to the need to reengage. During his first few days in office, Schacht received some encouraging signals through many intermediaries, such as Gerard Vissering, the governor of the Nederlandische Bank, that Montagu Norman at the Bank of England was keen to find some way of bringing Germany back into the world economy. Norman had to be one of the keys to reestablishing Germany’s credit abroad. No major bank, in either London or New York, would think of lending money to Germany without a nod from him. Schacht’s first action after taking over at the Reichsbank was to bring his family back from Switzerland; the second was to arrange a meeting with Norman in London.

11. THE DAWES OPENING

Germany: 1924

Be extremely subtle, even to the point of formlessness.

Be extremely mysterious, even to the point of soundlessness.

Thereby you can be director of the

opponent’s fate.

—SUN Tzu, The Art of War

SCHACHT ARRIVED at Liverpool Street Station in London on the boat train from Berlin at 10:00 p.m. on New Year’s Eve, 1923. London café society was back in full swing after the war, the streets crowded with revelers. Schacht had arranged to be met by the economic counselor at the German embassy, Albert Dufour-Feronce. As he stepped off the train, he also found waiting “a tall man with a pointed grayish beard and shrewd discerning eyes” who, much to Schacht’s surprise, introduced himself as Montagu Norman. “I do hope we shall be friends,” Norman said confidingly in his soft voice as he led Schacht to a cab. Before they parted, Norman insisted that they meet at Threadneedle Street the following morning, even though it was a holiday and the whole City would be shut.

Schacht was taken aback by the warmth of his welcome and was even more bemused when he learned from Dufour-Feronce how keen the governor had seemed to establish a personal bond with his German counterpart, insisting, “I want to get on well with him.”

Schacht was more than flattered that Norman would turn out to welcome him on a cold and foggy December evening when most people were celebrating. After all, he was the supplicant come to enlist